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Fiscal Policy in Recessions
hard

Which of the following fiscal policy actions is most effective in stimulating economic growth during a recession, and why is it classified as such?

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Choose the Best Answer

A

Increasing government spending on infrastructure projects to create jobs and boost demand.

B

Implementing tax cuts for high-income earners, expecting them to invest more in the economy.

C

Reducing government spending to decrease the national debt, which will stabilize the economy.

D

Increasing tariffs on imports to protect domestic industries, thereby increasing domestic production.

Understanding the Answer

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Answer

During a recession, one of the most effective fiscal policy actions to stimulate economic growth is increasing government spending. When the government spends more money on projects like building roads or schools, it creates jobs and puts money into people's hands. This extra income encourages consumers to spend more, which helps businesses grow and can lead to more hiring. For example, if the government invests in a new highway, construction workers get paid, and they might then spend money at local shops, boosting the economy. This action is classified as effective because it directly injects money into the economy, helping to revive demand and support overall growth.

Detailed Explanation

Increasing government spending on projects helps create jobs. Other options are incorrect because The idea is that rich people will invest their tax savings; Cutting spending can hurt the economy more during a recession.

Key Concepts

Fiscal Policy
Recessionary Gaps
Aggregate Demand
Topic

Fiscal Policy in Recessions

Difficulty

hard level question

Cognitive Level

understand

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